The outcome of the RBA’s final board meeting for the year on Tuesday is being taken for granted – nothing happening. But Michael Pascoe owns up to the real story being beyond the cash rate non-event.
A confession: in my penguin-focussed coverage of last month’s RBA meeting, I missed the main story but so did everybody else.
Well, no, not quite everybody. Glenn Dyer and Bernard Keane writing in Crikey ($$) saw the real yarn: on the RBA’s forecasts, real wages are going backwards again this financial year.
The AFR caught up with the story on Friday, adding the extra sauce of the first official monthly CPI update giving annual inflation of 3.8 per cent, topping the RBA’s headline CPI forecast of 3.7 per cent for the year to June while its wage price index bet is 3 per cent, down from the 3.4 per cent actually recorded in the year to the end of September.
This is all the stuff of forecasts though with the usual caveat that forecasting is a mugs game. If the economy continues to pick up a little as the latest national accounts suggest, you’d think wages could continue to grow at a bit more than 3 per cent and the RBA Governor herself has said the new monthly CPI updates will be treated with caution for a while.
The immediate bottom line is that none of it matters for this week’s RBA board meeting. Interest rates are going nowhere, the penguins are sitting pat, and the various febrile headlines jumping in one direction or the other with each statistical release haven’t added up to a case for change.
Back in the real world
Back in the real world, real wages falling again is where pain is felt for the many Australians finding less left in their wallets after they pay their bills.
And here I am a lone voice in again declaring that everyone ignores the reality of how our income tax pans out. This financial year, someone on a median full-time wage of $90,000 before tax who gets a 3 per cent pre-tax raise will only receive a 2.6 per cent increase in their after-tax pay packet.
(If it doesn’t make sense to you that a 3 per cent pre-tax increase is only 2.6 per cent after tax when the marginal tax rate is unchanged at 30 per cent, feel free to check the numbers yourself with the ATO’s calculator. What the usual superficial reporting of pay increases ignores is the impact of the tax-free threshold on the individual’s overall tax bill.)
So the real world is a harsher place than acknowledged by the RBA forecasts or the AFR. Living standards are going backwards again for anyone not beating the wage increases.
There is a little relief on the horizon. Labor’s $268 tax cuts in each of the next two years effectively offset the after-tax variation. A 3 per cent pre-tax rise next financial year will round to a 3 per cent after tax rise.
For those two years, the wage price index and the CPI offer a straightforward verdict on whether real wages are rising or falling.
The bad news is that the outlook for 2026-27 won’t make up for going backwards this year.
And without ongoing incremental tax rate trimming, the gap between pre- and post-tax increases will be back from June 2028 unless, and it’s a big “unless”, the 2028 election year finds a government with the ticker and the vision for genuine tax reform, not just tinkering.
Good luck with that.